Under general principles, granting a guarantee results in a guarantor assuming risk because a lender may claim its receivables from both the debtor and the guarantor. Under the corporate income tax law such risk must be valued for tax purposes and, if the guarantee is received without consideration, it constitutes income-in-kind for the recipient of the guarantee.
On 31 July 2019, the Supreme Administrative Court (NSA) ruled on a case where two entities granted each other reciprocal guarantees, but the value of the loans for which the guarantees were granted differed. The NSA concluded that additional income arose on the side of the entity receiving the guarantee of higher value.
Two months earlier, on 30 May 2019, the NSA ruled on another case relating to reciprocal guarantees. In that case companies belonging to the same capital group implemented a group policy of granting mutual guarantees. Under this policy they undertook to grant each other reciprocal guarantees without charging. The NSA ruled that a guarantee received for no consideration triggers taxable income for the recipient, even if the company which receives the guarantee is obliged to provide a reciprocal guarantee whenever required by the other group entity. The NSA differentiated between the theoretical obligation for group members to provide each other guarantees on request from the actual provision of such guarantees. The actual provision of a guarantee arises when the guarantor concludes a guarantee agreement with the lender and not when it just promises it will do so if requested by a sister company.
The position of the courts is evolving in respect to the taxation of mutual guarantees. We are aware of judgements issued in similar cases in previous years which provided that where companies undertake to grant each other reciprocal guarantees, this obligation itself constitutes a form of consideration and no free-of-charge benefit arises for the recipient of the guarantee.
How can ASB Tax assist you?
We recommend checking the terms under which any guarantees are granted between group entities to establish when and how they are valued and taxed. If you would like ASB Tax to advise you further on the consequences of such arrangements, please contact us:
Head of Tax
Photo: Adrien Olichon